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Recovery in sight after historic contraction in COVID-19 crisis
The Dutch economy was hit hard in the past year, marked by the pandemic, but recovery is in sight. Although the contraction of GDP was the largest on record, at 3.8%, it was still smaller than feared when the pandemic broke out, and also smaller than in many other countries. With the arrival of several vaccines, we can now look forward to a return to public life and the recovery of the economy. This year, De Nederlandsche Bank (DNB) forecasts growth of over 2%, and for next year growth of more than 4%. However, considerable uncertainty persists. Virus variants that are resistant to the current vaccines could throw a spanner in the works. This crisis has revealed that economic developments are difficult to predict and that it pays off to be in the right shape to cushion a blow. It is important to consider this in economic policy.
These were the conclusions of DNB President Klaas Knot, in the annual report published on Monday.
The fact that the Dutch economy held up is partly thanks to policy-makers’ response to the crisis. The government implemented substantial emergency packages, which were supported by the monetary policy of the European Central Bank (ECB). The economy proved resilient as it was inherently healthy before the pandemic struck.
Vaccination means the end of the crisis is in sight, and it is now important to focus on recovery. In this respect it is useful to consider the lessons we can already draw from the current crisis.
For instance, this crisis has made it abundantly clear that solid buffers are essential. In recent years these had been built up in the Netherlands, both in public finances and at banks. These buffers made it possible to provide an adequate response to the crisis. There will always be another crisis and it is better to have a firm cushion in place to absorb it. The new government must therefore prevent a permanent hole in public finances, and must ensure that the national debt to GDP ratio does not increase further, once the pandemic is under control.
International cooperation again proved vital for dealing with the economic consequences of a crisis. The right combination of policy instruments is crucial. Governments cooperated, and emergency packages from EU Member States were supported by the ECB, which provided favourable financing conditions. The European Recovery Fund arrived just at the right time. The combined efforts of countries and the mix of policy instruments generate more than the sum of their parts.
Although recovery is on the way, various challenges still lie ahead.
In the wake of the pandemic, bankruptcies will be inevitable when the government scales back its emergency packages. Businesses that have been shown to be essentially healthy must be prevented from failing after the crisis. In case of imminent bankruptcies, creditors would do well to get involved. We must also endeavour to ensure that bankruptcies do not result in unmanageable loan losses for banks. Because that could have dire consequences for the financial sector.
“On the road to recovery” also means we have to make our economy more sustainable. We have less than 30 years to achieve climate neutrality by 2050. If we fail to do so, we can expect to face a much more drastic crisis than COVID-19. Greening the economy is necessary to limit the effects of climate change on our prosperity and our well-being. Together with the necessary reforms on the labour and housing markets, this is one of the largest challenges for the new government.
For the Introduction to the press conference by DNB-president Klaas Knot, see here
For the complete annual report in Dutch, see here